Are those Cranes or an Inventory Glut on the Horizon?
Portland's condo market faces the future
By Ellen Lewis

Boston. Miami. Chicago. Las Vegas.
San Diego. The mere mention of these markets is enough to strike fear
in the heart of any real estate agent or developer specializing in condos.
Since 2006, the national condo market has softened, and in many overly
optimistic cities where demand has exceeded supply, the condo bubble has
downright popped. Of course, when it comes to issues related to livability,
Portland is used to being a national exception. But as market after market
topples ever westward, is the Portland metro condo market doomed?

First, let’s look at some quick numbers. In 2004, the average price
of a Portland condo increased 16 percent over 2003. In 2005, the price
increased more than 27 percent over that. Then in 2006, the price increased
just 400 dollars — a less than 2 percent gain.

If that number alone isn’t off-putting enough, consider the fact
that new condos currently under construction number roughly 3,500, which
is more than four times the normal market supply. No wonder some in the
industry are prompted to reminisce about the dot-com bust of 2001.

Certainly Portland has not been as hard-hit as some other cities, but
some say it’s just a question of time. Brian Richards, a broker,
developer, and builder in Columbia County, says, “Oregon is the
end of the trend line because we’re the last place money has flowed.
Places like San Diego and other places ahead of the curve have already
gotten there. We’re at the end of the national cycle. We haven’t
reached a point yet where we’re saturated with inventory, but by
this fall the game will be over.”

Everyone can agree the market has softened over last year, says Jerry
Johnson, a land-use economist with Johnson-Gardner. “If you bought
last year, you’re not in a good position.”

Some observers believe the market has reached a precarious point. Steve
Wong, senior vice president at Scanlan Kemper Bard, and a real estate
banker who has financed construction projects such as The Westerly, reports,
“The investment funding is waiting to decide. Last year, I’d
hear of maybe half a dozen significant new projects gearing up. Now there’s
one. Or none. Now, developers are spending more on advertising and holding
potential buyers’ hands. Those projects ready for occupancy are
selling better.”

Are those cranes or an inventory glut on the horizon?

While inventory is approaching an all-time high, the construction of
new units, fueled by the market’s high prices of last summer, shows
no signs of slowing. The completed units have given depth and maturity
to the market that didn’t exist a few years ago, but the demand
has yet to keep pace. “Trammel Crow, Opus and Homer Williams are
all sitting on the sidelines waiting to see what will happen with the
current situation,” notes Brad Meyer, a multi-family investment
broker with CB Richard Ellis. “In 18 months, the activity will pick
way up, and my prediction is that they’ll sell well.”

Whether a developer has white knuckles or is inclined to shrug and smile
depends on that developer’s projects, says Bob Ball, a historic
developer and citizen activist whose projects have included Marshall-Wells
Lofts and The Avenue Lofts in Northwest Portland’s Pearl District,
as well as the renovation and conversion of the historic apartment building
The Embassy into condominiums. “There’s a supply being absorbed
in a steady fashion. The best developers will be fine,” Ball says.

How did we get here?

Johnson names a few contributing factors. “The trend of 05-06 was
an anomalistic trend of pre-sold units. We’re out of the period
of pre-sells. We’ve got more product on the market. Prices are rising
along with construction costs. The percent of ownership is going up to
70 percent, and I’d say half of that is attributable to subprime
debt.”

Subprime loans have been the dirty words of the industry, causing belief
among some homebuyers that they can afford a property that might be out
of reach. In last year’s market Richards says, “Subprime loans
allowed people to buy more property than they could afford. There are
a lot of unethical people out there, and the mortgage industry looks the
other way. When people can’t qualify, it doesn’t matter what
the price is.”

“Portland is not Miami,” says Ball. “We thought we
saw large gains, but they are really small compared to the national market.
Our market reflects our values system in that it isn’t so reckless.”

What has made the condo market so vulnerable is that outside investors
were allowed to buy large percentages of condo properties with the intention
of turning them over quickly, or “flipping” them. With the
goal of making as much money as possible, these investors created a sense
of artificial demand, “surfing the wave,” Richards says. “That
pushed the prices up.”

Revisiting his theme of quality development, Ball says, “The best
developers didn’t allow too many outside investors anyway. In San
Diego, they were buying up blocks of 30 units at a time.”

Now however, observers say, with fewer outside investors snapping up
properties, the market has normalized. “Outside investors buying
the individual units have pretty much gone away. For a while they were
putting money down and then looking to get out. In some cases, they’d
walk away, leaving their money on the table,” says Wong.

What happens next?

“If we hold pricing, that’s a victory,” says Johnson.
“We need to work the inventory off. The market used to be so hot,
you could put condos anywhere. We’re about to reach the point where
subprime mortgages aren’t going to be viable.”

Asked about Portland Development Commission’s possible future actions,
Johnson says, “They’ll protect their investments, and they
may restructure debt on some projects. But they shouldn’t bail people
out, because no one gets bailed out in a good market.”

Richards believes there is a bigger issue on the horizon — the
possibility that some major local lending companies may go bankrupt. “The
Federal Accounting Standards Board allows lending companies to declare
interest they haven’t received yet as income. That means they’re
turning losses into income, which inflates the value of the company. If
enough people default, they might not get that income at all. The whole
time, the companies are experiencing declining earnings across the board
while increasing the deferment of interest, and properties are going down
in value.”

Calls to local lender Washington Mutual for a comment on this issue were
not returned.

Renters beware

The National Association of Realtors reports that Portland’s real
estate market is slowly joining the national trend, with large national
investment funds beginning to avoid financing condo projects, instead
turning their focus to apartments to increase the possibility for income
over appreciation.

The Ladd Tower, an $85 million high-rise on the South Park blocks will
be placed on the market as luxury apartments rather than condos, as the
principals had originally planned. Johnson explains, “Because the
rental market is weak, rents are inexpensive compared to ownership. It
will normalize, and rental rates will go up.”

Portland’s unique future

Fortunately, there are big differences between the burst-bubble markets
and Portland’s. The big one, livability, is still a big lure to
newcomers from California and the rest of the country.

Johnson comments on one other way Portland is unique: “Portland
is slower to downturn in part because it’s difficult to get things
done here. Over-building is hard.”

Ball says, “Our urban growth boundary keeps our focus on density
growth and our quality of life is so good, people keep wanting to move
here. There’s a supply being absorbed in a steady fashion.”

Ball has reason to be optimistic. As one of the most successful developers
in Portland, he points out, “Location plus great living spaces equals
value. People feel comfortable where they feel their investment will be
solid. The buildings that will always do well have a strong team of architects
and builders. When you’re in a difficult market, you need to know
what you’re doing.”

Even with all its strengths, Portland could be doing more to increase
its marketplace health and future livability, claims Ball. “We need
to invest in a future transportation plan with our regional partners,
along with the Port of Portland and Metro. What needs to happen is for
government to understand where we need to go, develop a framework to keep
citizens safe, provide after-school programs, good paying jobs. We’re
poised if we do the right things.”

Richards predicts, “Just like the dot-com market, this market will
take off again and hit a normal growth rate.”

Nevertheless, he does say there is still a good reason to buy in today’s
market. “If you want to buy a house and you can afford it, with
5 percent and a 30-year fix — and you’ll stay in it for 10
years, buy. Your house is not an investment; that’s a fallacy. You
need something to live in. Rates are good today, so if you can afford
it, go ahead.”

What’s hot, what’s not

Current market conditions mean that even if prices haven’t dropped,
buyers now have choices that didn’t exist just a few short months
ago. And the experts have weighed in on where buyers and the financers
are putting their money. Meyer says, “The high-end units are doing
well. The lower-end ones are done. Those condos in the hot neighborhoods
downtown — Mississippi, Hawthorne and Alberta — priced in
the $400,000-$600,000 range will continue to sell.”

Demand is steady for his high-end properties in the Pearl, says Ball.
“Mature developments have bars, galleries, yoga, shopping, and transportation
just outside your door.”

However, he adds, “The South Waterfront will take a number of years
to realize the vision.”

Other areas of value include, “Sellwood, Alberta and Mississippi,
and the big sleeper is St. John’s. That area could be unbelievable,”
says Ball.

Johnson, like Ball, believes that select properties in the secondary
market, close-in on the Eastside will do well. But Johnson says, “Some
of the projects were not well conceived, and those are the quarter-, half-
and full-block sites in areas that are not close to the commercial centers.
The absorption rates are very slow at these sites, and 3-6 months from
now, some will sell one a month and maybe one per quarter.”

And what about that flock of cranes, South Waterfront? “The area,”
Johnson projects, “will take longer than PDC thinks. I don’t
know how they’re going to do transportation. But their feet are
held to the fire by PDC, so I am worried that they’ll try to beat
the market by delivering faster than the market can absorb.”

Portlanders caught in the middle

With so many Portland residents having already downsized to condos, new
residents may be the best hope for creating that demand. For-sale signs
are staying up on the million-dollar homes in the West Hills, historically
a seller’s market, giving buyers more of a choice than they’ve
had in the recent past. Unfortunately for those buyers, prices have remained
mostly steady, while interest rates have started to climb.

“I don’t think there are any deals,” says Richards.
“Right now I’m talking people out of buying. A client wanted
an investment house to sell in three years, and I said, ‘What happens
if it’s worth less in three years?’ We’re going to have
to go to buy and hold as a strategy.”

Subsidies for affordable housing, even in the hottest neighborhoods,
have allowed low-income people to own condos. On the other end of the
scale, luxury condos are playing to newcomers who arrive with built-in
incomes from other states. The people in the middle are wondering where
this leaves them. A 2006 PDC study shows “developers need to build
condominiums with … options that are affordable to younger families
but also remain financially viable to developers.”

That may not be possible, CB Richard Ellis’ Meyer says. “In
order to make a project tensile, or financially practical, it must be
priced at $300-$350 a square foot. I don’t think people who live
and work in Portland can afford that.”

PDC’s Larry Brown admits that without tax credits and federal funds,
mid-range buyers have a more difficult time. But he counters that a great
example of workforce housing is The Civic on Burnside. With prices beginning
at $175,000, The Civic has presented an option, though units at that level
were quickly snapped up.

And then are those lured from out of state, but who haven’t cashed
out a California home. Many of these young newcomers still hope to be
able to afford Portland’s quality of life, says Richards. “I
can understand that, if you can get a job here.”